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Contract Farming System

Mains-GS3-Economic Development, Prelims-Economy

1. Odisha has allowed investors and farmers to enter into contract farming agreements following the pandemic.

2. The government will constitute a ‘Contract Farming and Services (Promotion and Facilitation) Committee’ to review the performance of contract farming.

What is contract farming system?

1. It is an effective way to coordinate and promote production and marketing in agriculture.

2. It is essentially an agreement between two parties,

a) First Party- Companies, government bodies or individual entrepreneurs.

b) Second Party- Economically weaker farmers.

3. The approach can contribute to increased income for farmers and higher profitability for sponsors.

4. Under this system, the farmer agrees to provide agreed quantities of a specific agricultural product.

5. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser.

Which are different models?

1. Informal model

a) It is the most transient and speculative of all contract farming models with a risk of default by both the promoter and the farmer.

b) Small firms conclude simple, informal seasonal production contracts with smallholders.

c) Success often depends on the availability and quality of external extension services.

2. Intermediary model

a) The buyer subcontracts an intermediary such as collector, aggregator, or farmer organization, etc. to formally or informally contracts farmers.

b) It is a combination of centralized and informal models.

3. Multipartite model

a) This model can develop from the centralized or nucleus estate models. For example, privatization of community companies.

b) It involves various organizations such as governmental statutory bodies, private companies and even financial institutions.

4. Centralized Model

a) The buyer sources products from and provides services to large numbers of the small, medium, or large farmers.

b) The relation or coordination between farmers and contractors is strictly vertically organized.

c) The quantities (quota), qualities, and delivery conditions are determined at the beginning of the season.

5. Nucleus estate model

a) In this model, the buyer sources both from own estates/ plantations and from contracted farmers.

b) The estate system involves significant investments by the buyer into land, machines, staff, and management.

c) The nucleus estate usually guarantees supplies to assure cost-efficient utilization of installed processing capacities and to satisfy firm sales obligations.

Why is the system beneficial?

Advantages for farmers

1. Inputs and production services are often supplied by the sponsor.

2. This is usually done on credit through advances from the sponsor.

3. Contract farming often introduces new technology and also enables farmers to learn new skills.

4. Farmers' price risk is often reduced as many contracts specify prices in advance.

5. Contract farming can open up new markets that would otherwise be unavailable to small farmers.

Advantages for sponsors

1. Contract farming with small farmers is more politically acceptable than, for example, production on estates.

2. Working with small farmers overcomes land constraints.

3. Production is more reliable than open-market purchases and the sponsoring company faces less risk by not being responsible for production.

4. More consistent quality can be obtained than if purchases were made on the open market.

Where lies the problem?

Problems faced by farmers

1. Farmers face the risks of both market failure and production problems, particularly when growing new crops.

2. Inefficient management or marketing problems can result in manipulation of quotas to escape the purchase of all contracted production.

3. Sponsoring companies may be unreliable or exploit a monopoly position.

4. The staff of sponsoring organizations may be corrupt, particularly in the allocation of quotas.

5. Farmers may become indebted because of production problems and excessive advances.

Problems faced by sponsors

1. Land constraints faced by contracted farmers due to a lack of security of tenure can jeopardize sustainable long-term operations.

2. Social and cultural constraints may affect farmers' ability to produce to managers' specifications.

3. Poor management and lack of consultation with farmers may lead to farmer discontent.

4. Farmers may sell outside the contract (extra-contractual marketing) thereby reducing processing factory throughput.

5. Farmers may divert inputs supplied on credit to other purposes, thereby reducing yields.

Source- The Hindu and FAO website